In-Depth Review: CarMax Auto Owner Trust 2025-1

Introduction

CarMax Auto Owner Trust 2025-1 is an asset-backed securitization (ABS) vehicle sponsored by CarMax Business Services, LLC and facilitated by CarMax Auto Funding LLC. The trust issues notes backed by a pool of auto retail installment contracts originated through CarMax’s retail auto financing operations. This review unpacks the key features of the Issuing Entity’s 10-K filing, highlights the structural and credit considerations, and assesses the investment potential of the ABS.

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1. Structure and Business Description (Item 1 Omitted)

Issuer and Sponsor

• Issuing Entity: CarMax Auto Owner Trust 2025-1 (Delaware statutory trust).
• Depositor: CarMax Auto Funding LLC, responsible for transferring auto loan receivables into the Trust.
• Sponsor & Servicer: CarMax Business Services, LLC, a wholly owned subsidiary of CarMax Inc., handles loan origination, servicing, and administration.
• Indenture Trustee: Wilmington Trust, National Association (for the notes) and U.S. Bank Trust National Association (for the trust agreement).

Transaction Overview

• On January 1, 2025, CarMax Auto Funding LLC sold a designated pool of retail installment contracts to the Trust.
• The Trust issued multiple classes (“tranches”) of asset-backed notes to investors, with principal and interest paid from the underlying loan payments.
• No external credit enhancements (third-party guarantees or letters of credit) are provided; the transaction relies on internal credit spreads, excess interest, and overcollateralization inherent in the pool.

2. Pool Composition and Credit Enhancement (Regulation AB Disclosures)

Pool Obligor Concentration (Item 1112)

• No single obligor accounts for 10% or more of the pool assets.
• A diversified pool of retail auto loans originated by CarMax dealers across the U.S.

Credit Enhancement and Third-Party Support (Item 1114)

• There is no external credit enhancement provider.
• The credit support arises from:
• Excess interest spread (the difference between pool yield and note coupon).
• Overcollateralization (principal balance of loans exceeding note face value).
• Servicer advances for delinquent payments (CarMax Business Services guarantees timely interest and fees on the notes up to specified delinquency thresholds).

Derivatives (Item 1115)

• No derivatives or hedging instruments are used to manage interest rate or other market risks.

3. Risk Factors, Legal Proceedings, and Compliance

Risk Factors (Item 1A Omitted)

• Pursuant to General Instruction J, the 10-K omits industry-specific risk factors, but investors should review the prospectus specifically for:
• Credit performance of collateral (delinquency, default rates).
• Interest rate risk and prepayment risk.
• Servicer concentration (CarMax Business Services is sole servicer).
• No external liquidity facility.

Legal Proceedings (Item 1117)

• No material legal proceedings that could adversely affect noteholders or the Trust.
• Standard representations that no governmental action or material lawsuits are pending against the Sponsor, Depositor, or Issuing Entity.

Compliance and Servicing Criteria (Items 1122–1123)

• Servicing Parties (CarMax Business Services and Wilmington Trust NA) have each provided compliance reports attesting to adherence to servicing criteria.
• No material instances of non-compliance were identified in the attached Servicing Reports and Attestation Reports.
• The Servicer has furnished a signed Compliance Statement, confirming ongoing adherence to regulatory servicing standards.

4. Financial Statements and Operating Results (Items 7, 7A, 8 Omitted)

The filing omits key financial disclosures under General Instruction J, because the Trust itself is a passive securitization vehicle rather than an operating company.

What’s Missing?

• Item 7 (MD&A) and Item 7A (Market Risk Disclosures) are not presented.
• Item 8 (Financial Statements) is omitted. The underlying financial statements of the Originator (CarMax, Inc.) appear in its separate 10-K.

Implication for Investors

• You must rely on the prospectus supplement and pooled collateral reports for:
• Weighted-average coupon rate and term of auto loans.
• Delinquency and default history.
• Projected cash flow waterfalls and stress-testing.

5. Credit Assessment and Key Considerations

Credit Quality of Collateral

• CarMax’s auto loan portfolio historically exhibits moderate credit performance, with relatively conservative underwriting compared to subprime originators.
• Loan seasoning and performance trends are critical: early defaults can erode credit enhancement.

Structural Protections

• Excess Spread: CarMax retains a portion of loan interest margin, serving as the first layer of loss absorption.
• Overcollateralization: Principal excess provides additional cushion.
• Servicer Advances: CarMax advances scheduled payments for shortfall periods, ensuring continuity of interest distributions to noteholders.

Absence of External Enhancements

• Without third-party guarantees, investors depend entirely on the structural credit supports and collateral performance.
• In severe downturns, CarMax’s corporate credit quality and liquidity will influence servicer advances.

No Derivatives; Interest Rate Risk

• Floating- vs. fixed-rate mismatch may expose some tranches to interest rate fluctuations.
• Prepayment speeds can shorten effective duration, impacting yield.

6. Investment Potential and Score

Given the available disclosures and the typical performance of CarMax-originated auto loan pools, this trust offers:

• Pros:
• Diversified retail auto loans.
• Established sponsor/servicer with strong track record.
• Clear structural credit supports (excess spread, OC, servicer advances).
• Cons:
• No external credit enhancement.
• Omitted financial and risk-factor details in this 10-K require supplemental review of prospectus data.
• Auto ABS exposed to consumer credit cycles and concentration in used-vehicle retail.

Investment Score (1–10): 5.0
A mid-range score reflecting a balanced risk/return profile. Investors seeking ABS yield with moderate credit quality should review tranche-level metrics before committing capital.

7. Net Profit or Loss

This 10-K reports on a securitization trust, not a profit-generating operating entity.
Net Profit/Loss: Not applicable; cash flows pass through to noteholders according to the waterfall structure.

Next Steps for Investors

1. Obtain the prospectus supplement and pooled loan report.
2. Analyze tranche coupons, spreads, and structural ratios (OC, ES).
3. Monitor CarMax’s corporate credit profile (ratings, liquidity).
4. Stress-test pool performance under economic downturn scenarios.

Conclusion

CarMax Auto Owner Trust 2025-1 provides a fairly transparent and well-serviced auto loan ABS structure, but the absence of external credit enhancement and the omission of detailed financial disclosures in this 10-K mean investors must perform additional due diligence with the offering documents. A balanced investment score of 5.0 reflects moderate risk/reward—appealing to ABS buyers comfortable with retail auto collateral.